The Market Takes its Toll--but Monster Fabs Bare their Fangs in 2008

Average Selling Prices (ASP) for Memory, especially DRAM and Flash, have experienced a shocking decline since the beginning of this year. Price pressure continued in the last quarter with spot and contract prices declining to new lows. Not surprisingly with the lower prices, demand for Memory devices such as NAND Flash is looking good. Forecasts predict skyrocketing numbers as we are just at the dawn of a huge and growing market. Some forecasts show that the NAND Flash demand will grow from 737 billion megabytes (MB) in 2006 to 33.5 trillion MB in 2011. This is a 114% CAGR (2006 to 2011).

Ramping Up NAND

As low prices also accelerate demand, some companies cannot keep up. Toshiba, for example, is already unable to meet demand for its NAND flash memory devices and is reportedly sold out until December. Looking ahead, Toshiba expects NAND bit growth to jump 120 percent in 2008 and 115 percent in 2009. Though unhappy with the sale price trends, it plans a huge capacity ramp to meet soaring demand. In addition, Korean chipmakers are shifting their production capacity from DRAM to NAND.

On top of all this, Memory companies are fueling the market with even larger fabs. Many are concerned—because they fear that this will accelerate further decline in ASP to gain market share in an already soft-pricing environment. Concerns about oversupply have surfaced and companies like iSuppli have reported recently that “oversupplies push memory markets in the dumps.”

As the market starts taking its toll, companies react in various ways as they try to meet forecasted demand. Some must cut back their capex, leaving only a few to expand.

Fab Forecasts—the Easy Way

The SEMI “Fab Database Reports” track the activities of each fab—from capital spending for construction and equipping, to capacity ramping, technology upgrades and expansions. The October 2007 Edition reveals that we currently face a weaker outlook in construction and equipment spending for 2008 as many companies cut back on their spending plans and wait for the market to improve.

Capital Expenditure Outlook on Fabs
After an 8% year-over-year (YoY) increase in 2007, spending on construction projects will stagnate in 2008 to zero or even negative single digits. Spending on equipping fabs may experience an even sharper decline from plus 8% growth (YoY) in 2007 up to minus 10% in 2008 (see figure).

Some companies respond to slower market conditions by cutting spending, restructuring, accelerating efforts to increase productivity, and other cost reduction efforts. Some announce huge layoffs (e.g., most recently, Samsung cut 1,630 jobs, Conexant cut 20 percent of its workforce, and Micron about 10 percent). Companies such as Promos have announced tremendous cuts in capital spending from $1.8 billion in 2007 to $800 million planned for 2008. Foundry UMC announced “significant cuts” in capex, as did TSMC. Qimonda recently admitted being below their FY 2007 capex plan, and their FY 2008 capex is lower than FY 2007.

Soaring Demand for NAND Flash

However, not all companies are cutting. As mentioned earlier, Toshiba plans a huge ramp to meet soaring demand for NAND flash. Samsung has traditionally increased spending midyear when many need to cut. Samsung increased their capex plan of $6.9 billion (including Austin) at the beginning of this year to a high spirited $8.35 billion. Although in smaller dimensions than Samsung, Winbond is more than doubling its capex from $245 million to $587 million.

Although Taiwan, Japan and South Korea are the largest regions in 2007 (and 2008) in terms of fabs equipping, the capex paradigm causes a regional shift in growth from year to year. In 2007, only two regions, Taiwan and China, showed significant growth for fabs equipping, while in 2008 Europe/Mideast and Southeast (SE) Asia show significant growth. While Intel and AMD contribute to most of the growth in Europe/Mideast, the growth in SE Asia is attributed to Tech Semiconductor, IM Flash, Chartered and Qimonda.

Memory Companies Fuel the Market

Besides Samsung and Hynix, memory companies keep fueling the market. Rexchip, a DRAM joint-venture (JV) between Powerchip and Elpida, is pushing into the market heavily, as does Flash Alliance. Rexchip started production this year with a 70,000 wafer per month (wpm) capacity 300 mm fab. This is only the first of four planned fabs, with the second fab starting construction in July of this year. It is expected to begin operations in the second half of 2008. Qimonda will start construction of their 60,000 wpm 300 mm fab in Singapore at end of this year.

Acceleration of Monster Fabs

Flash Alliance will most likely accelerate the ramp of their Megafab or “Monster Fab” Fab 4 (the largest in the world with 210,000 wpm maximum 300 mm capacity) and will possibly start construction of their Fab 5 (also 210,000 wpm) by the middle of next year. With ST Microelectronics, Hynix will ramp its 80,000 wpm 300 mm DRAM/Flash fab in Wuxi, China to full capacity by end of this year. They will also convert Fab M10 in Icheon to a 110,000 wpm 300 mm fab.

Foundry Outlook

Meanwhile, we expect the top four pure-play foundries, TSMC, UMC, SMIC and Chartered to make cuts in their capital spending plans; but maintain or increase a high utilization rate. TSMC, UMC and Chartered together are expected to cut 2008 capital spending by at least 10 percent. Spending on the SMIC fabs, included the ones it manages, depends on plans by its partners and other funding entities.

UMC announced that capex for 2008 will be significantly reduced, though it will invest to 1) enhance productivity of certain critical and capital intensive equipment; and 2) expand capacity by focusing on converting capacity from older process technologies to more advanced processes. We also expect UMC to begin equipping Fab 12B by the end of 2008 (12B is currently under construction). Next year, TSMC will complete the ramp of Fab 14 Phase 2 and will begin ramping Fab 14 Phase 3. Both are estimated to have a maximum capacity of 40Kwpm–45Kwpm. SMIC and Chartered announced tight management of the upcoming capex pending market demand.

Capacity Outlook

Worldwide, we see a nearly 20% increase in fab capacity in 2007 and another11% increase in 2008. Of total installed worldwide fab capacity, Memory capacity will increase from 38% in 2007 to 41% in 2008. Japan is the leader in installed fab capacity in 2007 and 2008 with over 3.5 million wpm and over 3.8 million wpm, respectively, (in 200 mm equivalents). Taiwan and South Korea follow, with capacities of 2.5 million wpm and 2.6 million, respectively, in 2007—and 2.8 million to 2.7 million in 2008. The U.S. is the region with the fourth-largest installed capacity base with 2.4 million wpm in 2007 and 2.7 million wpm forecasted for 2008.

Although our indicators show slowing in 2008, this may change. Many companies (not all) slow down or pull back some of their expansion plans in reaction to declining market conditions. But this could change quickly should the market show signs of improvement. Maturity in the semiconductor industry means it is able to react to changes much more quickly than in the past.

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